Erring between extremesDialogue with the Alter Ego on Quantitative Easing No. 3, first drafted Sept. 15,published on Sept. 19, 2012--------------------------------------------------------------------------------------------------------------------

Question by Alter Ego of Noah denkt™ (AE): The wires are flushing with comments on the Federal Reserve’s newly announced quantitative easing program No. 3 (QE III). The idea of the program is to stimulate the economy and to create employment by the massive purchasing of mortgage backed securities. Does Noah denkt™ have any thoughts on QE III?Answer by Noah denkt™ (Nd): Well, as you know our overall conviction tends to be closer to a supply side world view than to a monetarist Keynesian view. Nevertheless, any reasonable human being has to recognize that nobody really knows what the best possible answer to any given situation really is. So human beings have no other choice but to err between the extremes sometimes favoring a more interventionist view, sometimes advocating in favor of a freedom first perspective. In this specific case, we, hence, find that it may well be worth giving Keynesian theory this one last chance to demonstrate that it can do the trick without causing unwanted side effects that eventually supersede the gain that was originally being intended.

AE: Uh, that’s a somewhat surprising reaction on your part! Why are you so accommodating and cautious here?Nd: Because any fundamental philosophy change should be preceded by ample evidence that the previous, opposite thinking does not work sufficiently well.

AE: But isn’t there enough evidence as it is which speaks against the Keynesian theory? Just think of the huge debt levels in national budgets almost all over the world! Think about the structural unemployment base that most of the Keynesian countries are living with. And do not forget the fact that most Keynesian societies have an aging population which suffers from a considerable lack of dynamic energy!Nd: Sure, but can we really say that all these thing would be so much better if we had adopted supply side politics instead? – No, the simple fact is that we do not know what kind of tragedies we would have lived through if we had chosen a comprehensive free market approach. It, hence, makes sense to advise everyone (including Ron Paul and Marc Faber) to be a little more cautious in their commenting on Bernanke’s politics. After all, the Fed Chairman is at least trying to do the right thing. And contrary to most critics he is not shooting from the hip (as we ourselves do most of the time) but is constructing his views from an ample study of scientific evidence.

AE: In other words, you are by now wavering in your own supply side convictions?Nd: Not really. We are just a little less outspoken about them.

AE: Is this because you don’t trust your own scientific competence in this matter?Nd: To a degree, yes.

AE: And doesn’t that question the legitimacy of the overall Noah denkt™-project?Nd: No, it doesn’t because most people, most politicians and most economists aren’t clear-cut this or clear-cut that.

AE: Can you give us some examples to that effect?Nd: Sure. Take, for instance, all these, supposedly free enterprise commentators in the US (say, CNBC’s Joe Kernen) who usually criticize the ECB for being overly concerned with price stability. Does it really make sense to generally believe in free markets when at the same time you want the central bank to do more to spur growth? Or take all the European critics of the Fed’s dual mandate: Is it really ideologically coherent to criticize this dual mandate and defend Obama’s mandatory health insurance law at the same time? – No, the truth is that most experts are quite ambivalent about government non-intervention on one side and counter-cyclical meddling on the other. In fact, we haven’t yet found too many supply side advocates who wouldn't want to ask for government help, once they themselves come under substantial economic strain. After all, most of these people tend to be employees themselves. Only a very small number of them does in deed venture to create their own independent enterprise.

AE: Could it then be that free market theory is simply too demanding on human beings for that theory to still be viable?Nd: Who knows. It certainly isn’t easy on us.

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